Thursday, March 25, 2010

So the word is out about the Dubai World plan. The markets seem to love it.

So I have read the press releases and someone was nice enough to send me a transcript of the conference call. Naturally I'll have to write more extensively a bit later but my initial thoughts are the following:

1.) As I would have imagined much more support is being given to Nakheel than to Dubai World both because it needs more and also because it's creditors are more likely to be hostile.

2.) The support of Abu Dhabi in this is conspicuous for its absence. Dubai is basically draining to zero the DFSF and throwing in additional money from the Emirate of Dubai and converting what debt is owed to Dubai to equity putting itself behind other creditors. It is a Dubai only show.

3.) Despite the cash injection Nakheel is explicitly not granted any government guarantees. During the conference call the spokesperson declined to comment on any government guarantees of Dubai World itself on account of a "confidentiality agreement." I'm not sure what that means. How can a government guarantee instill confidence if it is protected by a non-disclosure clause. Seems kind of self defeating.

4.) The Nakheel restructuring plan is quite complex. $9.5 billion goes in from Dubai and the DFSF to "fund operations and liabilities." Fund operations? It seems that they are very concerned about a group of creditors which I have not so far considered on this blog: the people who bought real estate off plan and whose projects have stalled. It seems they are going to put the funds toward continuing construction and will offer swaps to off plan installement buyers in the developments which can be completed. They are also going to pay off trade creditors for under $500,000 in full and creditors over that amount will get 40% in cash and 60% in a "tradable security" so that they recieve 100% of their credit back. Anyone want to bet with me that the "tradable security" will trade at a substantial discount to face almost immiediately?

5.) I'm not sure what all this means for the Nakheel Sukuk holders. They seem to me to continue to bear a substantial amount of risk to Nakheel, Nakheel's execution capaility and through that to Dubai real estate in general. As I mentioned in my last post about this the trouble for Nakheel is that it can't raise new capital to continue its operations. So what Dubai is doing is going all in, not to secure the sukuk holders, but to continue operations. To do so it is using the money to continue construction, but is only paying out existing trade creditors 40% plus some "tradable securities."

Looking at the balance sheet of Nakheel as of June 30 2009, it seems that the accounts payable represent 28 billion AED, 40% of which is 11.2 billion AED or $3 billion. So now there is $6 billion left to fund operations and pay liabilities. Presumably the reason they want to continue operations is so that they can actually recieve some of the 17 billion AED they are owed in off plan installments but I wonder how much of the remaining $6 billion will be required to do that. The press release says a "substantial" amount will go toward construction.

If I were a sukuk holder I would sell on this pop.

6.) Interestingly I'm not sure the sukuk holders will get a chance to vote on the proposal because in the view of Dubai World they are unaffected assuming all other stakeholders agree to their restructuings. There are no changes to the terms of the sukuks being made. This is almost certainly because the sukuk holders are likely to be the mst recalcitraint group.

7.) The Nakheel proposal is very complex and requires a lot of people to agree to things which seem a little far fetched. Trade creditors have to take an opaque haircut determined by the degree to which their "tradable securities" trade at a discount. The bank creditors all need to agree to extend maturities. Owners of non-existent apartments on non-existent islands have to agree to take villas that are actually being constructed in a different location. There are a lot of moving parts and I think this announcement is a major step forward. However, I don't think this story is over.

Wednesday, March 24, 2010

OK, I just got out of bed in New York and now it's on the tape that Dr. O has been arrested. Interestingly I have already written on this subject a while back. More than once actually. Maybe I should have a new tag line for the blog: "Wall St. WTF, todays news three months ago." Kidding, this is more about ex post facto analysis. Breaking the news is for those guys and gals at The FT, The National and Zawya. Stay tuned.

Tuesday, March 23, 2010

I have to be totally honest. When I first saw the news on Bloomberg that the DFSA had dissolved the board of Damas and taken action against the brothers Abdullah I engaged in not a small amount of triumphalism. After all I had been railing against these guys and the inaction of the regulatory authorities in my blog for months. Whenever I logged into Bloomberg right after checking the markets I would look up Damas news to see if there was anything I could write about.

When the news finally went across the tape, I felt vindicated. I felt as though my blog had played a role in bringing it about. By constantly harping on it and claiming that it would undermine the confidence of the markets in the DIFC and thereby damage the Dubai World restructuring I felt that perhaps I helped force the powers that be in Dubai to act. Having read the report of the DFSA I was especially vindicated in my decision to publish the tip I received on the true purpose of the Dubai Ventures vehicle. Of course the DFSA report contains many things on which I did not report so perhaps I didn’t have too much to do with it. I’ll console myself with the thought that somehow the 50,000 page views that my Damas articles have gotten over the past few months had at least some influence on the decision of the DFSA to act if not a decisive one.

The DFSA report itself reads like a spy novel with a surprise ending. It opens with a cast of characters and a list of weapons. First the villainous Brothers Abdullah and their tools of espionage and deception: the various legal entities, assets, and liabilities front companies and the like. Then there is our hero the DFSA with its’ virtuous arsenal outlined in the section entitled “Relevant Legislation and Rules.” When you get into the main body of the it has exciting chapters like “The 42.5 Million Transaction” or “The Gold Transaction” or, exotically unless you have been there, “The Sharjah Transaction.” Step by step, transaction by transaction you can see our hero stalking his prey. Layer by layer a truly astounding series of frauds are uncovered.

The brothers Abdullah siphon millions of dollars out of the company into their private accounts. When money is tight they conspire with Dubai Ventures to rig an IPO on the DIFX in order to swindle $170 million out of international investors which they promptly use a variety of means to steal. They use company funds to buy a building in their own name and then sell the building back to the company for a huge multiple of the original price and pocket the difference. Over two tons of gold go missing into the pockets of the Abdullah brothers never to be heard from again but are magically replaced from the company’s own stocks. Money is borrowed in the name of the company and paid out to the brothers. Land owned by the brothers is sold to the company for 46 million AED without any independent valuation. To the Brothers Abdullah Damas is a treasure house to be systematically looted, to the shareholders it is a house of mirrors: a mystery, wrapped in a riddle locked in an enigma.

But the DFSA is on the case. With every paragraph we can see our hero get closer and closer to the quarry. Stalking him, laying the trap, ready to spring... It’s like watching James Bond tailing a Evil Mastermind, through the labyrinthine streets of some ancient city. The Mastermind is so confident that he is above the law that he doesn’t even notice the agent stalking him. He brazenly goes about hatching and executing his evil plans little knowing that the Bond/TheDFSA are hot on is tail, watching, building the case, planning, waiting for the moment to strike.... Then, the moment comes. The Mastermind turns his back and Bond/DFSA springs into action, reaching into is coat pulling out his weapon and plunging it into the back of the villain... WHO BURSTS OUT LAUGHING BECAUSE OUR HERO HAS JUST SPENT MONTHS STALKING HIM IN ORDER TO STAB HIM WITH A SAFETY PIN.

I don’t want to admit it but that’s how the thing reads on the first pass. If you read the entire document the punishment does not seem at all to fit the crime. These guys stole 600 million AED or almost $170 million, the entire proceeds of the IPO not counting the fraudulent investment in the IPO from Dubai Holding. I’m sorry did I say steal? The DFSA calls them loans with non-commercial terms such as "without interest and with no fixed repayment date or schedule." Hmmmm... what is the difference between a gift with an option to repay and a loan with no obligation to repay? Or for that matter between having someone steal from you or borrow from you without asking or paying interest for an indefinite period? If you’re a shareholder, nothing.

The Abdullah Brothers borrowed/stole it using every kind of scheme and ruse imaginable and what does the DFSA do? It fines them $3million, $2.7 million of which is suspended indefinitely. So the bill due to them: $300,000. To put that in perspective if the Brothers Abdullah invested their ill gotten gains in 2 year T-Notes they would have earned their fine twice over in the time it took the DFSA to investigate their frauds, no problem DFSA. Heck, if you wait 18 months we can pay the whole $3 million back just with interest we earn on what we borrowed/stole. That is an awesome deal for the Brothers. So what do the shareholders get out of all this? The same deal the Brothers Abduallah negotiated with themselves and the Board which was recently fired. They promise to pay back all the money over time and if they don’t they agree to hand over their shares which are now worth vastly less than $170 million. Actually, try less than half that. Not such a great deal, it sounds like the Abduallah Brothers come out on top.

That’s one way to read it and that’s how it appears on the surface but, as with so many things in Dubai, you have to look a little bit past that to get the whole story. One of the things that the DFSA order does is compel the Brothers Abdullah to provide a list of all their assets both those they own free and clear and those which are encumbered in some way. It then places a lien on behalf of Damas on all these assets. Their original agreement with Damas gave them quite a bit of leeway as to whether and how they disposed of what assets they have with regard to repayment of the funds they withdrew from the company for their personal use. Now virtually all their assets are pledged to the undertaking, not simply their shares in Damas. Also the undertaking empowers the DFSA to seek additional legal action for the enforcement of this pledge in DIFC courts, decisions of which can then be handed to Dubai courts for enforcement.

On the surface this seems like a pretty weak judgement, and according to the letter compared with what one would expect in the United States it is a pretty weak judgement but it is important to remember the context. What this undertaking essentially does is economically destroy one of the most prominent business families in Dubai. It is important to remember what the financial position of the Abduallah Brothers most likely is. I joked earlier that if they invested their ill gotten gains in T-Notes they would earn back their fine every ten weeks or so. The truth is they did not invest in T-Notes, they invested in Dubai and other real estate projects right through the peak of the market. I would say it is a near certainty that they cannot afford to repay Damas, which they are obligated to do on a timeline and for which all their assets have now been pledged. Whether they are fined $300,000 or $30 million makes no real difference, they are going under because of the repayment clause. This is not over, the undertaking is the beginning not the end of the travails of the Abdullah Brothers. When they miss the first instalment of their payments to Damas we will see what the DFSA does to enforce this agreement, then we’ll know whether it has teeth or not.

I think there is another aspect of this that might not be obvious to a Western observer. The school of Sharia law practiced by the courts in the GCC does not necessarily have the concept of precedent. It is up to the judge to interpret the Koran and the Hadith according to the dictates of his own heart as he sees them in the circumstances presented to him. This makes it extremely difficult to obtain legal certainty and therefore Arab businesspeople will go to almost any length to stay out of court. In such a world, in order to have orderly commercial relations with other Arabs it is therefore essential to maintain a reputation for probity.

Such a reputation has real commercial value because if you have a reputation of dishonesty people won’t deal with you because they know they cannot enforce contracts against you. The Abdullah brothers were among the most prominent families in Dubai and the public exposure of their malfeasance, even if it was suspected before, will do real commercial damage to them. Even Mohammed Alabbar, probably the most prominent businessman in Dubai is caught up in the whole thing and has been forced from the Board.

Importantly, this undertaking fundamentally destroys the asset that was most important to the Abdullah brothers and the only thing that would enable them to recover: their good name. This sort of thing almost never happens in the middle east because the preservation of face is so important and many people consider it unIslamic to attack the reputation of another person. The fact that the powers that be in Dubai have allowed one of their most prominent members to be so publicly humiliated is, though perhaps small to Western eyes, a real step forward for the region.

Sunday, March 21, 2010

As longtime readers of this blog will know I have written extensively on the subject of The Great Damas Heist. I wrote not one but two articles on the damage this did to the DIFC generally. I wrote a fewarticles on the Heist itself and what I thought was a strange arrangement whereby the brothers basically agreed with themselves how they would go about repaying the money and suffered no regulatory sanction at all. I wrote about how the DFSA needed to be all over these guys and encourage my readers to take action.

Today they did take two actions. The First is an agreement with the Abduallah Brothers and the second is an agreement with the board of Damas itself. I have to go through the documents before I write a longer post but, having taken all involved to task so aggressively, I wanted to give credit where credit was due. It had bothered me deeply that a long night of financial opacity was descending on the DIFC, a place I had worked so long. Now that night has been broken by at least a single star of hope.

Saturday, March 20, 2010

So there seems to be a wave of optimism sweeping Dubai and its creditors of late. The Governor of the UAE Central Bank said that he thought that Dubai would not require any additional funds. A few days ago some bank officials in London were quoted as saying that they thought the talks between Dubai and its creditors were going well. The DFM has had a nice rally. Dubai sovereign CDS have traded off lowering the borrowing costs for all involved. Even the Nakheel sukuks have traded higher, up to $0.62 on the dollar, their highest in quite a while. This is all for the best as the final restructuring terms are due in a week or so. Dubai can use a little optimism.

Of course it probably pays to take this optimism with a grain of salt. I think it is possible that a deal will be worked out with the creditors of Dubai World at the holding company level. The creditors at that level are a syndicate of banks who have an interest in the preservation of their relationships in the Emirates and while Abu Dhabi may or may not be willing to pony up more funds they probably are willing to black list any banks that don’t play ball with the restructuring which probably means that the banks will play ball.

That said, I remain deeply sceptical of the outcome for at least the Nakheel bondholders. In my last post I said that at least some of the creditors of Dubai World and its subsidiaries will refuse what I think will be a coercive restructuring and try their luck with a liquidation. I made the case that the Nakheel Sukuk holders are by far in the worst position of any of the creditors and are also likely to press for liquidation. This is because the deal they are likely to get from Dubai will probably be the worst on offer precisely because they have the weakest position because their recovery rate is likely to be extremely low. To understand why it is necessary to have a look at a project called Dubai Waterfront.

For those of you who are not familiar with Dubai Waterfront it is the largest single real estate project undertaken by Nakheel. Keep in mind that Nakheel is the same company that has built several islands in the shape of palm trees and an archipelago in the shape of the world. So to say that the Dubai Waterfront is their largest project is saying something. It was meant to house 1.5 million people and to be twice the size of Hong Kong. As it turns out it today is a windblown abandoned construction site and much of its eventual land area remains under water as quite a lot of it was to be built in the Gulf like the Palm. Of course you don’t get this sense from the website. An article appeared recently in the excellent Abu Dhabi paper The National which does a pretty good job of illustrating just how serious things are for the Nakheel bondholders and I think deserves a closer look.

For starters look in paragraph two of the article. In it they say “Waterfront land valued at Dh7.6bn was used to secure three Islamic bonds issued by Nakheel with a total value of $5.25bn.” Hold on a second. Sure, 7.6 is more than 5.25 but these figures are in two difference currencies.7.6 billion AED is only 2 billion USD. So what you have is $5.25 billion in debt secured with $2 billion of assets. Uh oh. In America this is what is called an “underwater mortgage.” As it turns out they are underwater in more ways than one. The 2011 sukuk is secured by a 50 year lease on 61 million square feet of the Central Business District, the CBD is to be built on an island that has yet to be built so the trust asset is both literally and figuratively under water.

The article then goes on to describe the Dubai Waterfront as 65% of the land that Nakheel has under development. If we happen to take a quick look at the balance sheet of Nakheel which shows that “properties under development” account for AED 112 billion. So, 65% of that is 72.8 billion AED is an approximate valuation on the balance sheet of Nakheel of Dubai Waterfront related properties. Guess how much equity the firm has, AED 73 billion. If it’s touch and go for the bondholders it is lights out for the equity holders.

The article then goes on to describe certain fraudulent transactions whereby certain people for a “consulting fee” would agree to sell property to developers for below market rates. This seems a little funny to me because the value of that land has almost certainly fallen precipitously from whatever the earlier discount happened to be. Nonetheless, there can be little doubt that the shareholders of Nakheel, and ultimately the bondholder have gotten much less from the boom than perhaps they were entitled to. I like the practice in the Emirates of naming defendants by their initials. Anyone want to bet that the people being prosecuted are non-Emiratis? Anyone want to bet that the “consulting fees” paid to full blooded Emiratis were much higher and will go unprosecuted? You can never be sure because those issues will never see the light of day, but I think that’s the way to bet.

More interestingly is the tale of Omniyat. The real estate developer engaged in selling off plan real estate. Omniyat sold off plan real estate in the Waterfront development. It was quite successful and sold about 314 million AED worth of future apartments mostly to Russians. It then took 237 million AED and bought the land with it. Then it took another 101 million AED and spent it on marketing in order to bring in more buyers. How much got spent on building the apartments? Around 700,000 AED. I’m not sure how the contracts read but usually off plan real estate is sold on an instalment basis such that if a certain amount of construction is not completed the buyer need not pay any more. Something tells me that additional payments are unlikely to be made to Omniyat despite the fortune spent on marketing. I think this is kind of a microcosm of the whole of the Dubai Waterfront project.

I think the Omniyat experience is telling for the whole of the waterfront project and ultimately for Nakheel and perhaps even Dubai World. Omniyat paid the great majority of its funds to Nakheel to buy the land, which is essentially undeveloped desert at this point. Of the remainder it then spent virtually every last dirham on marketing in order to create the illusion of prosperity. I’m sure it’s offices are impressive. I’m sure it has ads on the sides of buses all over the world and ads for its luxury lifestyle apartments in glossy magazines catering to the international elite. What it does not have are any tangible assets that can be handed over to its creditors that approach anything remotely like what appears on the balance sheet.

I think Nakheel is Omniyat writ large. In 2005 the first parcels of land in the Waterfront sold out in a few days for 13 billion AED. Looking at the balance sheet we can see that here in the future Nakheel has little more than 500 million AED in cash and is owed 17 billion AED in receivables and prepayments which it is very unlikely to receive and at the same time owes 28 billion to suppliers. What happened to all that other money? It probably went into marketing, into fancy offices, and ultimately into the pockets of the connected Emiratis who worked there. What is the collateral for the bondholders? Nothing but a lot of undeveloped desert.

Thus I don’t understand the bull case for Nakheel or Dubai World. What is it going to take to actually develop this desert into actual sellable real estate the proceeds of such sales will be used to repay the bondholders? What will it take to actually create those crescent shaped islands that are on the balance sheet for billions of AED? It will take a massive infusion of additional capital to complete all these unfinished projects. Remember that what is currently underway is a negotiated write down of the previous creditors under extremely opaque circumstances. Given that, what is the likelihood that new creditors will appear to lend additional billions in order to ensure that the original creditors even get back the fraction of their principal which will be agreed by the end of the week?

If you ask me: zero. Something similar to what the Nakheel Sukuk holders will eventually get.

Monday, March 8, 2010

The FT reported last night that Dubai World executives are in London this week presenting their proposals for the Dubai World restructurings to the various creditors of Dubai World. This is the opening move what is likely to be the final act in the Dubai World saga. Nothing has been communicated to the public but the possible structures of the restructuring have been fed to the press and commented on in this blog and others. They are generally that the terms of the proposal may include some or all of the following: extensions of term, haircuts, government guarantees, securities swaps. It is also likely that there will be choices between degree of those things such as those who accept longer terms have greater return of principal and perhaps a government guarantee. I have no idea or special insight into what will be proposed or what will transpire but I want to point out a few things that might be helpful as the drama unfolds.

For all their outward unity Dubai and Abu Dhabi have very different objectives in resolving the crisis.It’s like the roles of the chicken and the pig in making your breakfast of bacon and eggs. The chicken is involved, the pig is committed. For Abu Dhabi this is an exercise in reputation management, for Dubai it is life and death. In the event of a a litigious liquidation of Dubai World Abu Dhabi will be deeply embarrassed. Dubai would be destroyed by that outcome, even if the parent company were saved but there was a messy unwind of one of the subsidiaries that threw into question the security of creditors in Dubai. This is because this would likely shut the capital markets to Dubai and its infrastructure based development would grind to a halt.

All Creditors are not created equal. The creditors will have varying degrees of power relative to the degree to which they have recourse to assets held outside the UAE. This is because they can litigate in those jurisdictions and achieve a greater recovery. I think it was a good step for the Dubai to establish the DIFC Tribunal for claims against Dubai World but it is untried and it is probably still likely to confer a, let’s call it “home field advantage” in litigation with creditors. Dubai’s power with the creditors varies to the degree that the creditor is interested in maintaining a relationship with Dubai or perceives that strong arming Dubai will damage its relationship with Abu Dhabi. The bank lenders at the holding company level probably have the most to gain in international litigation but the most to lose in terms of damage to their relationships if they do that. The hedge funds who have bought Nakheel sukuks don’t care about their relationship with Dubai but have recourse only to non-existent Arabian/Persian Gulf islands and therefore, in my opinion, are screwed.

More people can buy the bonds than can take possession of the collateral.This is an issue that I have not really seen raised as yet but I think that in the event of a liquidation of any of the real estate subsidiaries a disconnection between the ability of someone to lend money against an asset they cannot possess may have a sever effect on real estate throughout the region. This is an important but subtle point that may best be addressed through an example. There are no restrictions on who can own the Nakheel Sukuks. Anyone can buy them, indeed a great many of them are held by western hedge funds at this stage of the game. The land which secures them however can only be legally owned by GCC nationals. This means that the supply of capital to finance real estate is vastly greater than the supply of capital which can actually take possession of that real estate in event of default. This may mean that the debt is overpriced relative to the assets that secure it. In the event that Nakheel is liquidated the prices that result at auction to GCC nationals will probably be vastly less than if they were held in an open auction at which anyone could purchase them. This has the potential to illustrate to other international creditors the disconnect between owning debt and having recourse to the securing asset. This may choke off international finance to local real estate projects and further depress prices.

It is overwhelmingly likely some, perhaps a great many, of the creditors will refuse the terms on offer and seek to litigate.This is just my opinion but I think that the facts are generally the following: things at Nakheel are far worse than most of the creditors understand. What seems clear is that whatever Dubai offers most of the creditors are going to have to take very substantial losses. I think the Dubai Inc. marketing machine and the generally opaque nature of its financial disclosure has created an unrealistic sense among creditors as to how likely they are to be repaid. Add to this the fact that Dubai has significantly damaged its credibility over the past few months. The creditors may be tempted to believe that Dubai Inc. is just leading with an aggressive bid to establish a strong negotiating position. This may lead them to call what they consider to be Dubai’s bluff. The only way for the cards of either side to be shown is in a liquidation and that is where I think we are going at least in the case of Nakheel.

Wednesday, March 3, 2010

So after an illustrious career in finance I have finally made the FT. So if you didn't already know who I was, now you do. I agreed to let the FT use my real name in an article about middle eastern blogs.

Naturally the day they publish this what do I have up? A joke article about the recent assassination in Dubai. So to give you a sense of what this blog is all about I'm going to publish a list of some of the more popular articles.

I didn’t really want to write on this subject but people have been emailing me the craziest conspiracy theories about this. The best one so far was that Sheikh Al Thani of Qatar secretly flew to Dubai to present an offer from the Israelis to pay off Dubai Worlds debts in return for silence on the assassination. Why the Israelis would go through Qatar rather than the US for something like that I don’t know. As embarrassing as this is it’s not exactly a secret that this sort of thing happens but usually the hush money is vastly cheaper than a Dubai World bailout. Sorry Nakheel bondholders, no Zohan rescue for you.

I know this is a politically tense thing, if you’re an Emirati you’re probably really mad. If you’re an Israeli you probably wonder why everyone is so mad. If you’re a poor schlep with a western passport who spends a lot of time in visa lines in the Arab world, get ready to spend a lot more time in them. Personally I don’t really have a dog in this fight. Both the guy who died and the guys who killed him knew the game and that it has only one rule: win or die.

The thing that I don’t understand is why the hit was so sloppy, aren’t these the best guys in the world? It was a neat trick using an electromagnet to close the latch on the guy’s room from the outside. Well done there and they surely used a big enough team to surveil him and then finally get him though they were probably counting having to overcome more security than they did in the end. As for the rest of it however, I’m no expert but I’ve read enough Ian Flemming and Alan Furst to know a few things. So for anyone else planning an assassination here are my tips.

Number one, if you are going to use fake documents to enter a country surreptitiously it is probably NOT A GOOD IDEA TO FAKE THE PASSPORTS OF DUAL NATIONALS WHO LIVE IN YOUR COUNTRY. While this might make it easier for you to make really good copies of the passport it kind of leaves your fingerprints all over the place.

Also, if you are going to do your hit in a major tourist destination with scores or hundreds of hotels like Dubai DO NOT STAY IN EMIRATES TOWERS WHERE YOU WILL BE UNDER CONSTANT SURVEILANCE, TAPES OF WHICH CAN THEN BE PUT ONTO YOUTUBE. There are any number of no-tell motels all over Dubai or better yet stay in the Embassy Suites in Sharjah. The place barely has electricity and running water, they sure as hell don’t have security cameras watching your every move. The getaway car might get stuck in traffic but you can be sure of not showing up on TV.

Most importantly, FAMILIARIZE YOURSELF WITH THE COUNTERINTELLIGENCE CAPABILITES OF THE NATION WHERE YOU ARE DOING THE HIT. Something tells me that the guys over at Mossad are scratching their heads wondering how in the name of God the Dubai police are all over this thing. I mean even if they got the killers on tape going into and out of the room where they did the killing how did they match them up with the people who checked into all the hotels and went through customs? Granted the disguises were pretty weak but there are literally a huge number of people who check into and out of these hotels from all nationalities every day. How did they do it? And so quickly.

I think I know. Someone once told me that Dubai had implemented a system that the police in Monaco use to track people moving around the city. As every cellphone activated itself in Dubai a computer began tracking and triangulating it and then recording its location as it moved around Dubai as well as recording at the very least who it called, who called it and perhaps even what was said. All this data was then stored in memory and run through pattern recognition software. There were always stories about the Dubai police having an uncanny knowledge of peoples whereabouts or arriving at the home of person who committed a hit and run before they did. I heard that this system was used to keep the Indian labourers from organizing a union. Things like that, but I never believed it. It looks like maybe I was wrong. It looks like perhaps Dubai does have such a thing and the agents were using cell phones which the Dubai authorities were able to triangulate to the room of the victim then go through the database and see who else was in proximity to them. Clever.

Of course there is another reason why the Israeli tradecraft might have been so shoddy: they want you to know.

Monday, March 1, 2010

Generally if you are a blogger the prediction business is a bad business. This is because it is pretty easy to look up your old predictions and find out whether they worked out or not. In an earlier incarnation of this blog I recommended two trades. One was a sale of SPY strangles which manifestly did not work out. The other was trading a reverse collar on gold which has worked out quite well. In my last post I tried to predict the prices of all assets in dollar bloc countries based on an attempt to read the mind of the Chairman of the Federal Reserve. I know it’s a bad business but in this case I can’t resist.

So what have we found out about the Dubai World saga in recent days? Interestingly Arabtec and Aabar have extended the due diligence period. This is a little disturbing but more interestingly Arabtec, now that it is almost going to be owned by Abu Dhabi has stopped work on a Nakheel project because Nakheel has not been paying it. Do you think Arabtec would have stopped this work if Abu Dhabi were not involved? I think not. So what does it say about Abu Dhabi support for Dubai World if one of its own future contractors has stopped work on Nakheel for lack of payment? Nothing good.

There are also the recent reports out from Moodys and the IMF about the exposure of the Emirati banking system to Dubai World. It turns out that the exposures of ADCB and Emirates NBD to Dubai are quite substantial. Emirati banks are owed something on the order of $15 billion by Dubai World entities and billions more by other government related entities. The IMF suspects that massive amounts of capital will have to be raised by the Emirati banks in the event that there is a partial recovery to the creditors of Dubai World, especially if it is on the order of $0.60 on the dollar.

And what of that report that the $0.60 on the dollar figure was something contemplated by Dubai World? Dubai has denied that this offer was made but that is not inconsistent with the article which said the offer was under consideration not that it had been made. Also one has to remember the penalties in terms of access and other tragedies that might befall journalists that one would suffer for printing a wholly fictitious story in Dubai about Dubai. Personally I think there must be some truth in the report at least as an indication of the scale of losses the creditors of Dubai World are likely to suffer.

The creditors of Nakheel are likely to do far worse. We won’t have to wait too long to find out how much worse, Nakheel has requested details of its bondholders in case it has to offer a securities swap to them. Well, it will have to because it doesn’t look like it has the capacity to pay them and from the Arabtec work stoppage I think we might be able to infer something about the level of support that Nakheel can expect from Abu Dhabi.

I think the easiest way to try to estimate what is going to happen over the next few months is to try to put yourself in the position of the most powerful actor in the unfolding drama: Abu Dhabi. So it is probably clear to the powers that be in Abu Dhabi that Dubai World is largely insolvent. At the very least Nakheel and Limitless are almost certainly insolvent, and Istithmar probably has negligible positive equity if it were to be liquidated. So whether the value of the Free Zones and DPW is larger than the balance sheet hole in Nakheel (also doubtful) will determine whether there will be much left to pay the creditors of the parent company. It is also possible that Nakheel is seeking information about its bond holders to try to discover whether or not it is likely to be able to secure approval for a securities swap. If enough vulture funds have bought the Sukuk to block a restructuring and force a default in what I think is a vain hope that Abu Dhabi will rescue it again, then they won't even be able to effect the swap. I think it is increasingly likely that the restructuring, if it occurs, is likely to be highly coercive to the creditors and that an outright liquidation is growning more likely.

As far as the foreign creditors are concerned I’m pretty sure no one in the UAE will care very much. Dubai is going to be shut out of international capital markets for some time if only because it’s credibility has been obliterated. Abu Dhabi will still have access but not require it because of its capacity to fund itself. The trouble is that a coercive restructuring of Dubai World has a very good chance of touching off a banking crisis inside the UAE. This is because the balance sheets of ADCB and Emirates NBD will be severely damaged and they may be forced to raise capital. Let’s assume that happens. What will be the next move.

Well, I don’t think that ADCB will have difficulty raising capital or receiving support from the Central Bank given the influence of Abu Dhabi on that institution. What about Emirates NBD? Well, remember Emirates NBD is the largest bank in Dubai and was created in a forced merger between Emirates Bank and the National Bank of Dubai. I remember laughing as I read about it when it was announced because there were no merger terms announced at the time, it was just announced that they were merging. It was clear that Sheikh Mohammed had decided that Dubai needed a banking champion and to create the largest bank he could be compelled the merger between the two largest banks. The CEOs knowing they had to do what the Sheikh told them but not knowing how to go about it simply announced the merger but no terms.

Fast forward to today. The Dubai World crisis is presenting Abu Dhabi with yet another opportunity to strip Dubai of more assets. If you think about if the Sukuk holders force a default, the liquidation of Nakheel would be a bonanza for Abu Dhabi based investors. While any international investor can buy the bonds of Nakheel only GCC nationals can buy the real estate behind them. So in a liquidation sale cash rich GCC nationals (read Abu Dhabi nationals as opposed to Dubai nationals) will be able to scoop real estate from panicked Sukuk holders. I’ll bet you a dollar that when the Dubai World restructuring is announced ADCB and Emirates NBD will both be forced to raise capital. ADCB will receive a combination of aid from ADIA or Aabar and the Central Bank. Emirates NBD on the other hand will be forced to merge FDIC style with a stronger institution based in Abu Dhabi. First Arabtec, then Emirates NBD. Who knows what’s after that?